Original author: EXIO
Source: PANews
I. Introduction
Bitcoin and its unique properties
Bitcoin, as the first and most well-known cryptocurrency, has garnered a lot of attention around the globe since it was founded in 2009 by the mysterious Satoshi Nakamoto. The core characteristic of Bitcoin is its decentralized nature, which does not rely on any central authority, but instead records transactions through a public ledger – the blockchain. This design not only guarantees the transparency of the system, but also enhances security, as modifying any information that has already been recorded requires the consent of a large part of the network's computing power. In addition, Bitcoin's global nature makes it unaffected by specific countries or policies, making it a unique international currency.
Bitcoin halving
Bitcoin halving refers to an event in the Bitcoin network where the rewards that generate Bitcoin are halved every four years. This is a pre-set rule in the Bitcoin protocol to control the supply of Bitcoin, mimicking the scarcity of gold. For every 210,000 blocks generated, the amount of new bitcoins received by miners is halved. From the initial reward of 50 BTC per block, to 3.125 BTC now in 2024. This cyclical reduction in supply could theoretically have a significant impact on the market by pushing prices higher while demand remains the same.
2. Analysis of the Bitcoin halving mechanism
Bitcoin Halving Definition & Historical Review
A Bitcoin halving is an event in the Bitcoin network where the Bitcoin reward for newly generated blocks is halved for every 210,000 blocks generated, approximately once every four years. This is a core part of Bitcoin's algorithm, which aims to control inflation and mimic the gradual slowdown in the mining of rare resources such as gold. Since the Bitcoin network was operational in 2009, it started with an initial reward of 50 bitcoins per block, and now it is 3.125 bitcoins in 2024. After each halving, the mining reward is reduced by 50%, which directly affects the miners' earnings and the entire Bitcoin economy.
The role of miners and their response to the halving
In the Bitcoin network, miners play a key role in maintaining blockchain security and processing transactions. Whenever a halving occurs, miners' rewards are reduced, and many less efficient mines may be forced out of the market due to reduced profits. In response to the halving, miners typically seek more efficient mining equipment and a lower cost power supply to remain competitive and profitable.
Analysis of the impact of halving on mining economics
Halving events often result in a significant re-evaluation between the cost of mining and the market value. The profitability of mining is directly affected, as reduced rewards mean that the same mining effort will generate less revenue without the price of Bitcoin rising. This has prompted mining companies to evaluate their operational efficiency, invest in more advanced technologies, or look for cost-effective energy solutions on a global scale.
Adjustments to miners' strategies, such as equipment upgrades and changes in geographic distribution
In order to adapt to the challenges posed by the halving, miners often employ a variety of strategies that include upgrading hardware, optimizing mining algorithms, and moving to areas with cheaper electricity bills. For example, many miners have migrated from China to Central Asia, Northern Europe and even North America to take advantage of lower energy costs and a more stable policy environment.
3. The impact of the halving on the supply of bitcoin
The halving directly affects the rate of new supply for Bitcoin, and in the long run, this reduction in supply could drive prices up while keeping demand steady. In this way, the halving event has affected Bitcoin's economic model, making it more of a "digital gold".
Source: https://www.tradingview.com/chart/BTCUSD/zDs32rdu-BTC-Halving-Cycle-Top-Analysis-2021-2022/
Bitcoin price performance before and after the halving
- 2012 Halving: The price of Bitcoin rose more than 100 times from $12 to $1,300, taking 357 days in between.
- 2016 Halving: Bitcoin price rose more than 27 times from $650 to $18,000 in 511 days.
- 2020 Halving: Bitcoin price rose more than 7x from $9,000 to $69,000 in 546 days.
Short-term volatility: After the past three halvings, the Bitcoin price has fluctuated within a month of the halving, but then has risen significantly over the following year. This phenomenon suggests that it will take time for the market to digest the impact of the halving, but will eventually react to the reduction in supply that comes with the halving.
Long-term upside: Despite the potential for volatility in the short term, historical data suggests that Bitcoin will bring significant gains in the long term after the halving. This is because the halving mechanism will continue to reduce the supply of Bitcoin, which has a total supply of only 21 million, making Bitcoin a scarce asset.
Bitcoin price performance before and after the halving
- First halving in 2012: A month after the halving, the price of Bitcoin increased by 9%. Over the course of the following year, the price of Bitcoin soared by 8,839%.
- Second halving in 2016: A month after the halving, the price of Bitcoin fell by 9%. Over the next year, the price of Bitcoin soared by 285%.
- Third halving in 2020: A month after the halving, the price of Bitcoin increased by 6%. Over the next year, the price of Bitcoin soared by 548%.
Miner selling pressure: Miners may sell Bitcoin after the halving, which could lead to price pressure in the short term. However, it is important to consider that the selling behavior of miners is often affected by market demand. If the market demand is strong, the miners' sell-off may be absorbed without a significant impact on the price.
Major Events and Price Impact of Bitcoin (2018 – 2024)
The launch of the BTC spot ETF
In January 2024, the first Bitcoin spot ETF was listed in the United States, marking the recognition of digital assets in traditional financial markets. It will further drive institutional investors into the cryptocurrency market, increasing Bitcoin's liquidity and market depth, which will have a positive impact on the price.
4. Advantages of Bitcoin as an investment asset
Comparison of Bitcoin with traditional assets (e.g. gold, stocks).
Often referred to as "digital gold," Bitcoin has similar non-government control and scarcity characteristics to gold, but it shows several advantages over traditional assets such as gold and stocks. First of all, Bitcoin's global and easy to trade offers advantages that transcend geographical limitations, making it easier and cheaper to store and transfer than gold. Second, compared to the stock market, the Bitcoin market operates almost around the clock, providing greater liquidity and trading flexibility. In addition, the price of Bitcoin is not directly affected by corporate performance or economic policies, which provides investors with a potential safe-haven tool, and Bitcoin may exhibit out-of-sync characteristics with traditional markets when global economic uncertainty increases.
As the chart shows, the cumulative return of Bitcoin over the past year has shown a significant difference compared to other traditional assets. The chart clearly shows the performance of Bitcoin against gold, the Dow Jones Industrial Average, the Nasdaq Composite, the S&P 500 and the S&P 500 bond index. It can be seen that Bitcoin experienced a period of sharp growth in October 2023, and its cumulative return has risen rapidly in a short period of time, far outpacing other assets.
This sharp growth underscores the potential and volatility of Bitcoin as an investment tool, while the growth of traditional assets such as stock and bond indices has been relatively steady. In addition, gold, as a traditional safe-haven asset, has seen more modest growth and volatility, in line with the performance of equity and bond indices. When analyzing the returns of these different assets, Bitcoin's uniqueness and high volatility offer a different path for investors looking for non-traditional growth opportunities.
As you can see in the chart, there is a significant correlation between the price of Bitcoin and its 30-day rolling volatility. For most of the time, we can see that the rise in the price of Bitcoin is accompanied by an increase in volatility. In particular, at the beginning of 2024, the price of bitcoin reached a peak, and at the same time, volatility increased significantly, indicating that large price fluctuations and investor uncertainty increased the volatility of the market. However, in March 2024, the price of Bitcoin fell sharply, which is also reflected in the sharp rise in volatility, indicating that the volatility indicator is an important indicator of market uncertainty and changes in investor sentiment when the price is moving rapidly.
In the cryptocurrency market, volatility is a measure of risk and is closely linked to price, which should be taken into account when making asset allocation.
Bitcoin's market acceptance and growth potential
In recent years, the market acceptance of Bitcoin has increased significantly, with more and more financial institutions and technology companies starting to support Bitcoin transactions or accept Bitcoin as a payment method. In the early years, the addition of international payment giants such as PayPal and Square made Bitcoin more mainstream, providing a convenient way for ordinary investors to invest and use. In addition, with the development of blockchain technology and the gradual improvement of the digital currency regulatory environment, Bitcoin's long-term growth potential is widely optimistic. As a borderless currency, Bitcoin's potential role in the global economy is gradually expanding, and its growth potential is recognized by many investors.
As of April 6, 2024, a number of well-known ETFs and listed companies hold large amounts of Bitcoin, reflecting the market's acceptance of Bitcoin and its growth potential. Bitcoin spot ETFs from large asset managers such as Grayscale, BlackRock, and Fidelity hold hundreds of thousands of units and have more than $50 billion in assets under management. This data not only shows the positive attitude of institutional investors towards Bitcoin investment, but also hints that Bitcoin is gaining recognition as an emerging asset class by more and more traditional financial market participants.
At the same time, among the listed companies, MicroStrategy, Galaxy Digital Holdings, Marathon Digital Holdings and other companies also hold a considerable amount of bitcoin, totaling more than 250,000 bitcoins worth more than $17 billion. The participation of multinational technology companies such as Tesla shows that the mainstream business field affirms and expects the future value of Bitcoin.
Overall, the large-scale Bitcoin holdings in both the asset management industry and major listed companies underscore the market's deep confidence in it and the potential importance of Bitcoin as an investment tool and store of value in global asset allocation. This trend bodes well for the increased maturity of the cryptocurrency market and wider market acceptance in the future.
5. Future outlook and investment opportunities
The diversification effect of Bitcoin investment versus traditional portfolios
Incorporating Bitcoin into a traditional portfolio can provide significant diversification benefits. Due to the low correlation between Bitcoin and traditional financial assets, it provides a means of risk diversification for portfolios. In an environment of global economic instability or inflation, Bitcoin even shows the characteristics of a safe-haven asset. By analyzing Bitcoin's performance under different market conditions, investors can better understand how to leverage this digital asset to optimize their portfolio's risk-to-reward ratio.
This chart reveals the low correlation between Bitcoin and traditional assets, with BTC generally not having a high correlation with mainstream assets such as the Dow Jones, S&P 500, NASDAQ, and Hang Seng Index, in addition to maintaining a high correlation with Ethereum. This low correlation demonstrates the advantages of BTC as a diversification tool in a portfolio, helping to diversify the portfolio's systemic risk. Especially when traditional markets are volatile or facing downward pressure, this feature of BTC may provide investors with a degree of protection, thereby reducing the volatility of the overall portfolio. Therefore, the addition of BTC can be seen as a strategic allocation aimed at increasing the risk-adjusted return of the portfolio.
This chart illustrates the normalized cumulative returns of a traditional 60/40 portfolio (60% in equities and 40% in bonds) versus portfolios with different proportions of Bitcoin allocations over the past decade, as well as the trend in the price of Bitcoin. 60/35/5, 55/35/10, and 50/35/15 represent the proportion of stocks, bonds, and Bitcoin in the portfolio. As the share of Bitcoin increases, so does the volatility of the portfolio's returns.
It can be observed that during periods of Bitcoin price increases, the return of the portfolio with the Bitcoin allocation is significantly higher than that of the traditional 60/40 combination. Especially after 2020, with the significant increase in the price of Bitcoin, the combination containing Bitcoin has shown stronger growth momentum.
However, this also comes with higher volatility, especially during peak and pullback periods of Bitcoin price. This suggests that while incorporating Bitcoin into a portfolio has the potential to increase returns, it also increases the portfolio's risk exposure.
This chart depicts the rolling 12-month Sharpe Ratio of Bitcoin against multiple assets. The Sharpe ratio is a measure of the excess return per unit of risk, and a higher Sharpe ratio means a higher risk-adjusted return.
As you can see from the chart, Bitcoin's Sharpe ratio is much higher than other assets in certain periods, indicating that it brings the largest excess returns per unit of risk. In particular, during 2017 and 2021, Bitcoin's Sharpe ratio peaked, reflecting its excellent ratio between return on investment and risk during these time periods. However, it can also be observed that Bitcoin's Sharpe ratio exhibits extreme volatility, corresponding to sharp fluctuations in its price.
In contrast, traditional equity indices such as the S&P 500 and Nasdaq have lower Sharpe ratios, while lower, but less volatile, reflecting more stable risk-adjusted return performance.